Structuring Operating Expense Pass-Throughs in a Long Island City Class B Office Lease

Every Class B office lease in Long Island City has an operating expense clause buried somewhere around page eleven, and almost none of the owners I meet with have looked at it since it was signed. That is a mistake, because the mechanism a lease uses to pass through real estate taxes and building operating costs to a tenant is doing one of two things every year: protecting your net operating income as costs rise, or quietly transferring that cost increase back onto you.

I get called into this conversation most often after a tax reassessment or a jump in insurance and utility costs, when an owner discovers that the escalation language in a five-year-old lease is not recovering what it should. By then the fix is the next lease, not this one. The better time to get this right is before the ink dries.

Base year vs. expense stop: they are not the same thing

Most gross leases in Class B office buildings in Long Island City use one of two structures, and owners routinely confuse them.

A base year clause fixes the tenant's expense obligation at the actual operating cost and tax level in the year the lease starts, and the tenant pays their proportionate share of any increase above that base each year after. If a 3,200-square-foot tenant signs at a base year of $16 per square foot in combined taxes and operating expenses, and costs rise to $18 the following year, that tenant owes their share of the $2 increase.

An expense stop sets a fixed dollar figure — say $14 per square foot — that the owner absorbs regardless of what actual costs turn out to be in the base year itself, with the tenant responsible for everything above that number from day one, including in year one if actual costs already exceed the stop.

The practical difference shows up when actual base-year costs run above whatever number the tenant's broker negotiated down to. A base year tied to actual costs protects the owner from that gap. A stop that was negotiated too low, especially in a market where brokers push for round numbers rather than audited historicals, becomes a permanent giveback that compounds every year the lease renews.

Run the arithmetic before you sign either structure. On a ten-year lease with 3% annual bumps, a $2 per square foot gap between the number that should have been used and the number that was negotiated compounds to well over $20 per square foot in cumulative underrecovery on a mid-sized floor. That is worth fighting for at the letter-of-intent stage, when it costs nothing to ask, rather than at renewal, when the tenant has every incentive to defend the number they have been paying.

The base year number is not a formality. It is the floor the tenant's entire expense obligation gets built on for the life of the lease.

Real estate tax escalations need their own clause, not a shared one

Taxes and operating expenses move on different timelines and for different reasons, and I still see leases in Long Island City that lump them into a single combined base year. That is a problem because a Department of Finance reassessment can move taxes 10–20% in a single year independent of anything happening to insurance, cleaning or utility costs, and a combined base year understates the owner's real exposure to that swing.

Separating the tax escalation clause from the operating expense clause lets each track its own base, its own proportionate share calculation, and — critically — its own language about assessment appeals. If you successfully grieve an assessment and taxes come down, a well-drafted clause lets you keep that benefit in the base year rather than passing a windfall back to tenants who never paid the higher rate to begin with.

Smaller floors and shorter terms sometimes use a flat percentage bump or a CPI-indexed increase instead of a trued-up pass-through, and owners often assume that is the simpler, safer choice. It can be, but only if the starting rent already reflects current market plus a reasonable cushion for expense growth. A 3% annual bump looks generous next to a 2% CPI print, until insurance and utility costs run 8–12% in a single year and the bump falls behind actual costs with no mechanism to catch up. Flat and CPI structures work best on short-term deals, not as the default for every lease.

The gross-up clause most owners leave out

If the building is not fully occupied, operating expenses that are driven by occupancy — cleaning, common-area utilities, management fees calculated as a percentage of costs — come in lower per square foot than they would at full occupancy. Without a gross-up clause, a tenant in a 60%-leased building is paying their share of artificially low total expenses, and the owner is absorbing the difference on every vacant unit.

A gross-up clause lets the owner calculate variable operating expenses as though the building were at a stated occupancy, typically 95%, for purposes of the tenant's pass-through calculation. This single clause, more than any other in this article, is the one I find missing most often in older leases, and it is worth 5–10% of recoverable operating expense income in a partially occupied building.

Audit rights cut both ways — use that

Tenants increasingly ask for the right to audit the landlord's operating expense statements, and owners often resist reflexively. I tell clients the opposite: grant a reasonable audit right, on a defined timeline, with a defined cost allocation if the audit finds an error above a set threshold. A clean, well-documented expense recovery process with real books behind it survives an audit easily, and having the clause in the lease removes it as a negotiating point that otherwise gets traded against something more valuable, like free rent or a lower base year.

Landlord advisory on lease structure is where this gets caught before it costs you five years of underrecovered income, not after.

What this looked like on one building

A 42,000-square-foot Class B office building on Jackson Avenue in Long Island City, six tenants, ranging from 1,800 to 11,000 square feet. Three of the six leases used a combined tax-and-operating-expense base year with no gross-up language, in a building running at 78% occupancy. I separated the tax and operating expense clauses on renewal, added gross-up language calculated at 95% occupancy, and reset the base year on the two leases coming up for renewal to actual trailing costs rather than the stale figures carried over from the original leases. The change added roughly $61,000 a year in recoverable expense income once both renewals were in place, with no change to face rent and no new vacancy risk, because none of it touched the number tenants see as their rent.

None of this requires firing a leasing broker or renegotiating existing leases early. It requires someone reviewing the expense language before the next lease or renewal goes out, calculating what a gross-up or a corrected base year is actually worth in dollars, and making sure the tenant's broker does not get the last word on language that determines your income for the next five to ten years. That is a fee-based review, not a commission-driven one, and it pays for itself on the first renewal.

Related reading: Class B Office Vacancy in Brooklyn & Queens: A Pricing Fix and 6 Lease Clauses NYC Landlords Should Hold Firm On. If you want this analysis run on your own building, that is what my fixed-fee reports cover.